Developments on non-compete clauses from a Spanish and Dutch law perspective

Two countries where the rules are becoming stricter include Spain and The Netherlands. There are further constraints in Singapore and the UK.

Recently the validity of non-compete clauses has been the subject of debate. Below, we take a look at the latest developments in this regard in Spain and The Netherlands.

Post-contractual non-competition clauses under Spanish law

Spanish law establishes that a company must compensate economically an employee if it wants to restrict their ability to work for some other companies using a non-compete clause.

The compensation issued by a company must be “adequate”. While the regulation does not precisely define what this means, the compensation must be in proportion with the restriction imposed -in accordance with time and geographic limitations. A maximum non-compete period is two years. Additionally, the company must demonstrate a legitimate commercial or industrial interest to prevent the employee from applying acquired knowledge in other companies.

If these requirements are met, the agreements remain valid independently of the cause of employment termination, unless expressly agreed otherwise.

However, the validity and enforcement of non-compete clauses has been up for debate recently, relating to include the possibility for the company to limit or eliminate (made it non-enforceable) when it must be executed (at the end of the employment relationship).

Recent decisions made by the Supreme Court established that a non-compete clause not only creates an expectation of compensation, but also necessitates preparation for future or potential new activities with fresh expectations. This is due to the legal nature of the post-employment agreement generating rights and obligations for both parties, the company and employee, as a separate agreement

Consequently, this means that allowing modification or termination of the clause through unilateral decision would render it null and void.

The referenced case law does not explicitly address what to expect if both parties have the authority to execute or waive the obligation, nor does it indicate whether in that scenario the clause would be determined as valid.

Post-contractual non-competition clauses under Dutch law

In the Netherlands, non-competition clauses have been on the agenda of politicians and social partners for many years.

According to the Dutch cabinet, research has shown that in many cases, the non-competition clause is included in employment contracts, often as a standard clause, even when there is no need or reason to do so. For example, when the employee does not deal with trade secrets, rates or customer data.

The Dutch cabinet states that the number of agreed non-competition clauses has doubled in a short time, for no good reason. In addition, research shows that the non-competition clause is used so often that it can lead to unjustified restrictions on employees. This can often interfere with the proper function of employees across the labour market as it restricts employee from changing jobs and remaining employed within their expertise and speciality. It can also make it more difficult for employers to hire staff.

Under Dutch law, non-competition clauses restrict the constitutional freedom of choice of the employment of employees. The employer's aim in doing so is to protect its business interests, for example, goodwill, trade secrets, knowledge of rates and customer data and files.

According to the Dutch Civil Code non-competition clauses are valid if the clause is agreed upon in writing with an employee of 18 years or older in cases of an open-ended employment contract. In cases of a fixed-term employment contract, the clause will be valid if agreed upon in writing with an employee of 18 years or older and where the employer’s written justification in that clause shows that the clause is necessary to protect important business or service interests.

Non-competition clauses may be partly annulled in court under the Dutch Civil Code. A non-competition clause may be annulled in its entirety if the clause is not necessary because of important business or service interests. A non-competition clause may also be annulled entirely or partially if, in relation to the employer’s protected interest, the employee is unfairly disadvantaged by that clause.

With a recently published bill on modernisation of the non-competition clause, the cabinet proposes several tightening of the regulations. The bill aims to reduce the number of non-essential clauses used, promoting free choice of employment, labour mobility and optimal labour allocation. It also sets out goals to balance the interests of both employers and employees, providing more legal certainty so that the right and obligations of employers and employees are clear in advance, in turn reducing the need to go to court. The bill also includes aims of maintaining the possibility for employers to protect the “company flow”.

However, the bill has far-reaching consequences for employers as it tightens the existing rules governing the non-competition clause in a number of ways. For instance, the bill sets limitation in duration of the clauses, which will now have effect for up to one year maximum after the end of an employment contract. The bill also addresses geographical scope, meaning the area in which the employee is not allowed to work must be specifically set out in the non-competition clause.

Additionally, the business or service interest(s) for concluding anon-competition clause must be justified for all employment contracts, not only for fixed-term employment contracts, as is currently the case.

Further, an employer must pay compensation to the employee when the non-competition clause is invoked. The compensation paid is required to be 50% of the last monthly salary earned, for each month the non-competition clause is invoked. For example, if the clause is invoked for six months, the employee is entitled to compensation totally three months’ salary.

The clause must be invoked by the employer by informing the employee in writing. The notification must also be timely, and state for how long the employee will be held to the non-competition clause. “Timely” shall mean one month prior to the end of the employment contract. There are a number of exceptions to this main rule, however. This includes issues in regard to summary dismissal or where the employment contract has been brought to an end through court proceedings.

Non-competition clauses that were validly agreed upon before the entry into force of the bill will remain valid. 

It is important to note that business relations and anti-recruitment clauses also fall under the scope of bill, meaning that the proposed amendments apply to these clauses.

On 4 March 2024, the bill was put up for internet consultation. This internet consultation has now been closed. It follows from the internet consultation that there is general understanding of the aim to reduce the non-essential use of the non-compete clause, but also criticism is expressed on several elements. This concerns, among others, the applicability to business relations and anti-recruitment clauses, potential abuse by employees and far-reaching consequences in case of late payment of the compensation by the employer (i.e. payment is still due, but the employee no longer has to comply with the non-competition clause).

The results of the internet consultation will be taken into account in the further drafting of the bill. After advice has been sought from the Council of State, the House of Representatives and the Senate will still have to consider the bill.

Co-written by Alicia Piqueras Pérez and Beatriz Moriones of Pinsent Masons.